Some Huizhou enterprises are open to making direct investments in Belt and Road countries.

Some Huizhou enterprises are open to making direct investments in Belt and Road countries.

Many enterprises from Huizhou in Guangdong Province would like to tapthe opportunities afforded by China’s Belt and Road strategic development initiative, in order to further expand their export business. This fact emerged at a recent seminar held by HKTDC Research. To make an effective entry into the Belt and Road markets, though, Huizhou businesses would first need to engage with the Hong Kong hub in order to obtain useful information about those territories. This could cover a whole variety of subjects from the condition of supply chains, the sourcing activities and product standards of local buyers, to related support services such as marketing and risk management.

Some attendees indicated that they are open to making direct investments in Belt and Road countries. However, before that could happen they would require professional consulting services to help them to understand local business cultures and investment risks. This would allow them to assess the feasibility of investing and setting up factories in these countries. Other respondents noted that certain Southeast Asian and South Asian territories are currently tightening up their policies and approval procedures relating to foreign direct investments. Therefore, these companies are very keen to keep abreast of the very latest developments within these markets.

On the whole, Huizhou enterprises wish to take advantage of the Belt and Road opportunities for overseas expansion. They intend to seek professional services in Hong Kong to help them address practical issues such as marketing and foreign investment procedures, or securing cost-effective funds to finance their overseas operations.

Huizhou has benefited from the influx of foreign capital over the years.

Huizhou has benefited from the influx of foreign capital over the years.

Huizhou Enterprises to Tap Belt and Road Opportunities

Continuous growth within the Pearl River Delta (PRD) economy has led to the gradual expansion of its production and commercial activities, from the Pearl River estuary to its eastern and western flanks. Huizhou is located in the north-eastern part of the PRD adjoining Shenzhen and it has already benefited from the influx of foreign capital over the years. To date, more than 9,000 foreign-invested enterprises have set up operations in the city. TCL, Desay, Adayo and Cosun, all of which figure among China's top 500 electronic information enterprises, are amongst the many well-known mainland companies who have established their corporate headquarters in Huizhou[1]. In doing so, they have contributed directly to the rapid development of the city's economy.

Huizhou enterprises are concerned about risk management when conducting Belt and Road business.

Huizhou enterprises are concerned about risk management when conducting Belt and Road business.

With Guangdong province’s foreign trade and economic activities on the rise, over recent years Huizhou companies have been active in going abroad in search of business expansion. Simultaneously, they have been exploring the Belt and Road opportunities. Statistics show that, to date, some 83 Huizhou enterprises have invested a total of US$460 million directly overseas, mainly in Hong Kong, Taiwan, Macau and the United States. Through their foreign arms, some of these companies have even reinvested either directly or indirectly in destinations such as Vietnam, Cambodia and Ethiopia[2].

In recent times, China has leapt into position as the world's second largest source of FDI[3]. It has also been strengthening its ties with Belt and Road territories, by means of investments and economic partnerships. Throughout, the South China region has stayed at the forefront of the country's external trade and economic co-operation activities.

During mid-2016, HKTDC Research conducted surveys in selected cities throughout Guangdong and Guangxi, in order to gauge the interest of mainland enterprises in exploring Belt and Road opportunities and their demand for related support services[4]. As part of this exercise, a business seminar was held in Huizhou in the third quarter of 2016 to garner the views of local production and trade enterprises. Their views are summarised as follows:

Focus on Southeast Asian market

Over the years, many enterprises in Huizhou have developed into large or medium-sized companies, while engaging in the production of high-tech products such as switching power supplies, fine-pitch printed circuit boards and other precision electronics. They now have many years’ experience in international marketing and their customers include multinational companies from Europe, the United States and certain Asian countries. Some of them are listed on the mainland stock exchanges and are among the leading manufacturers in China.

As China presses ahead with its Belt and Road initiative, most companies in Huizhou seem to recognise the importance of keeping abreast of new Belt and Road information so that they don't miss out on potential business opportunities. In order to facilitate the future expansion of their export business, many enterprises intend to further explore the Belt and Road markets, especially those Southeast Asian countries neighbouring China. Some even aspire to develop brand business within the Southeast Asian market.

Lack of practical market information

A number of the companies questioned are now familiar with the US and European markets and the large amount of relevant macro data which the government has provided to them. Nevertheless, most conceded that they are still unable to develop a clear concept of the Belt and Road initiative, which covers a huge number of countries and regions. Many companies expressed a fundamental lack of understanding about these markets, even those ASEAN countries which are geographically close to China. Businesses appear to require more data on the socio-economic environment, laws and regulations, industry policies, business culture and commercial risks relating to these territories. Information on local supply chains, the sourcing activities of buyers and product standards is also inadequate at present.

When it comes to market access, what these companies need most urgently is practical information to help them set up sales channels in the Belt and Road countries. In particular, they lack business intelligence about the specific needs of local markets, the characteristics of potential customers and other practical information about import requirements. Some enterprises highlighted the difficulties of effectively reaching buyers from Belt and Road markets solely through traditional trade fairs. Another matter for concern for these companies is the protection of intellectual property rights such as trademarks and patents within the Belt and Road markets, as they wish to avoid substantial losses which can result from third party infringement.

In the circumstances, Huizhou enterprises are eager to locate relevant support services via Hong Kong which could help them to further explore Belt and Road opportunities. Besides, they hope to utilise Hong Kong's financial market to secure funds for their overseas business. According to representatives of these companies, they first plan to expand their export trade, followed by investment in and establishing of factories overseas, and then, in the longer term, the acquisition of foreign brands.

Focus on market risk management

The general paucity of market information has created difficulties for enterprises in controlling their business risks and has hindered their efforts to develop the Belt and Road markets. For example, over the past few years the dealings of some small home appliance exporters in the European market have been affected by the weakness of the Euro. Though this situation has stabilised more recently, many Huizhou firms still prefer to focus on this familiar market rather than taking risks by venturing into uncharted territories.

Some enterprises who are engaged in domestic sales, including some brand owners which distribute diving and swimming gear in the mainland, indicated that the mainland market remains buoyant. As such, it would continue to be the focus of their business development. They remarked they were largely unfamiliar with the Belt and Road markets and believed that heading into these markets would entail greater risks. In all, they would not consider developing Belt and Trade operations for the time being, unless suitable risk management solutions become available.

Meeting the specific requirements of Belt and Road buyers poses some major challenges. Some companies with experience in shipping industrial and consumer goods directly to European and US buyers observed that, due to different product standards in the importing country, commercial disputes can arise. This is even in spite of the fact that the products have already passed factory inspections and tests prior to shipping. To minimise these risks, some enterprises intend to work alongside Hong Kong companies when exploring the Belt and Road markets. They believe that their Hong Kong partners could help to avert problems relating to product specifications and compliance of foreign standards.

Assess investment opportunities in Southeast Asia

On the subject of direct investment in Belt and Road countries, most enterprises indicated that preference would be given to territories within Southeast Asia. In order to assess the feasibility of investing in and setting up factories in certain Southeast Asian destinations, they said that they would seek practical advice from investment consultants.

Specifically, the information they are looking for would cover investment policies, industry facts, national and regional supply chains, the availability of production materials and logistics support and so on. Enterprises interested in investing abroad intend to use consultancy services and other professional amenities in Hong Kong, so as to obtain practical information for the assessment of investment projects in Belt and Road countries. They also hope to raise funds via Hong Kong in order to finance these investment projects.

Concern about investment climate and policy risks

Some companies pointed out that, due to the continuous inflow of foreign capital into Asia over recent years, some Southeast Asian and South Asian countries have gradually tightened their policies and approval procedures for FDI projects. Now they tend to give priority to higher value-added investment projects. As a result, it has become increasingly difficult for enterprises engaged in lower value-added, labour-intensive operations to find suitable investment destinations within Asia. Therefore, it is crucial for them to learn about the latest developments in these countries and assess future policy risks before making any investment decisions.

Setting up factories in some low-cost regions in Asia in order to produce export-oriented goods may help ease the problem of rising production costs on the Chinese mainland. However, these facilities would still have to pass audits by overseas buyers and comply with the relevant labour, environmental protection and social responsibility standards. At this stage, some low-cost Asian territories may not be able to meet the stringent requirements of these buyers.

Assessing other investment factors

While the cost of labour in some Southeast Asian countries is relatively low, the lack of skilled labour and technical personnel in some areas of production, such as jewellery processing, could make it difficult for businesses to support processing activities. This problem is further compounded by the lack of supplementary materials for industrial production. In view of this, some enterprises indicated that they wouldn't consider relocating production activities to Belt and Road countries in the short term.

Another important factor which businesses must consider before relocating their production lines is human resources management. One respondent to the study was an automotive electronics company which has gone abroad to invest and set up factories in Malaysia and Poland. They confessed that, although they have established a comprehensive global sales network, they still lack the talent to manage their expanding overseas investment projects and international sales. At present, their overseas factories are managed by local employees and as a result, cultural differences have led to some administrative problems. The company therefore wish to employ Hong Kong professionals with a global vision and knowledge of foreign cultures, in order to help them manage their business and enhance their overall operational efficiency.

HKTDC Research wishes to express its appreciation to the Department of Commerce of Guangdong Province and the Bureau of Commerce of Huizhou City for their assistance in conducting the research studies and company visits, as well as the Huizhou Association of Enterprises with Foreign Investment for their help.

[1] Source: Bureau of Commerce of Huizhou City

[2] Figures as at July 2016. Source: Bureau of Commerce of Huizhou City

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